Commentary and musings on the complex, fascinating and peculiar world that is securities regulation

Thursday, April 25, 2013

E.U. Moving Closer to Single Platform for Clearing and Settlement of Securities Transactions

As the E.U. moves towards a single platform for the clearing and settlement of securities transactions, there is a growing consensus that the proposed Central Securities Depository Regulation must be harmonized with Target2 Securities (T2S), an initiative on the operation of securities settlements. The President of the European Central Bank, Mario Draghi, emphasized that T2S is the necessary platform for setting up a single European market for securities. In recent remarks in Frankfurt Am Main, he said that T2S will make the post-trade environment safer and more efficient. It will reduce the cost of settling securities transactions and bring about significant collateral savings for market participants.

These collateral savings are particularly valuable at a time when demand for high-quality collateral continues to increase, as a result of both the crisis and new regulatory developments. But reaping the full benefits from the launch of T2S, noted the ECB chief, requires that it is complemented by the provisions laid out in the CSD Regulation proposed by the European Commission. The CSD Regulation is critical to post-trade harmonization efforts in Europe. The ECB’s Governing Council has stated its strong support for the proposed Regulation, which will enhance the legal and operational conditions for cross-border settlement in the EU in general and in T2S in particular. In this respect, the ECB has recommended that the proposed Regulation and the corresponding implementing acts be adopted prior to the launch of T2S.

Clearing and Settlement. The European Commission proposed a European common regulatory framework for the institutions responsible for securities settlement, called Central Securities Depositories. The proposal is intended to bring more safety and efficiency to securities settlement in Europe. It also seeks to shorten the time it takes for securities settlement and to minimize settlement fails.

The settlement period will be harmonized and set at a maximum of two days after the trading day for the securities traded on stock exchanges or other regulated markets. Market participants that fail to deliver their securities on the agreed settlement date will be subject to penalties, and will have to buy those securities in the market and deliver them to their counterparties. Issuers and investors will be required to keep an electronic record for virtually all securities, and to record them in CSDs if they are traded on stock exchanges or other regulated markets.

Target2 Securities. The Commission believes that the objectives of the proposed Regulation are consistent with those of Target2 Securities, a project launched to create a common technical platform to support CSDs in providing borderless securities settlement services in Europe. The two initiatives are complementary in that the proposed Regulation harmonizes legal aspects of securities settlement and the rules for CSDs at European level and T2S harmonizes operational aspects of securities settlement.

In a recent interview, European Securities and Markets Chair Stephen Maijoor said that ESMA stands ready to implement the CSD Regulation through proposed standards and guidance once political agreement is reached by the legislative bodies. ESMA is establishing working groups to start quickly when the Regulation is enacted. ESMA will need about one year to do its work, he noted, since the standards will necessarily be highly technical. Chairman Maijoor noted that because the CSD is a Regulation, not a Directive, it will be uniform throughout the European Union.